Starting on Monday February 2nd we are launching our SmartSaaS Business Profile series which will cover both Pure SaaS firms as well as those Cross-Over and Hybrid firms who are actively moving to a Software-as-a-Service model.  The idea is to get their thoughts not only into their firm but also what is happening SaaS industry today and in the future.
 

The series should be something unique to the SaaS industry and hopefully fun to read. Let me know what you think and if you want to suggest any companies that should be included in the series.
 

Kevin

I always thought that the Software-as-a-Service market would expland during a recessionary economy because:

1) Companies don’t have capital dollars to buy software

2) The ability to pay-as-you-go appeals to CFO’s

3) No infrastructure to buy, since it is hosted or in the cloud.

But this was a real surprise.   According to IDC,  2009 will be a breakout year for SaaS!  Robert Mahowald, research director at IDC says “SaaS thrives in down cycles, and as with the 2000 - 2001 downturn that gave Salesforce.com its start, the current freeze in IT and related Capex spending will help assure solid growth for most SaaS providers.”  Read the whole article.

As the economy continues to struggle, it also presents some interesting opportunities for stronger SaaS companies to pick up marketshare and eliminate competitors.

In a deal announced last Friday, Xactly - the leading SaaS company in the Sales Performance Management (SPM) market, acquired Centive in an all stock deal.  Centive is a long time player in the SPM market with many large customers and a gradually improving subscription revenue stream.  The company has been on a slow transition to an on-demand model for the past few years.  When I heard about the deal I thought about the old addage, ‘If you can’t beat ‘em, join ‘em’.  By combining the two firms, Xactly now increases their overall size and revenue footprint, adds new clients and gains a substantial East Coast presence, since Centive is based in Boston.  What was also announced is that Xactly will support the Centive platform for 18 months but will migrate all of the existing Centive customers to the new combined Xactly platform, which is a very smart move.  Don’t support two or more platforms, ever!  Consolidate the technologies now, you will save money and it is the only way the acqusition will make financial sense over time.

What is really happening in the background is the stage is being set for the main event, which is the battle for the control of the SPM space between Xactly and Callidus (NASDAQ: CALD) some time over the next 12 -18 months.  Callidus has been in the market for many years and in fact, Chris Cabrera, Xactly’s CEO is a Callidus alumni, so it will be interesting to see how this plays out.

Callidus has been diligently trying to move to an on-demand model for many years but their legacy of highly customized, on-premise deployments will be difficult (ie. impossible) to convert to a real on-demand solution.  Or put another way, I doubt their customers will want to re-buy their on-demand system from Callidus, because once it is installed and working, you really don’t want to touch it again.

Smartly, Xactly has used the recession to their advantage.  This is just the first of many deals as the Software market will begin a period of very active consolidation during 2009.

As I go out and talk to firms about Software-as-a-Service I am increasingly finding firms that offer technology solutions that won’t easily fit into a traditional software mold,  but want to move to a real subscription model.  Part of the reason is that capital budgets are clearly being cut back in 2009 and also because of the success of larger, publicly traded SaaS firms and their perceived market value.

Consider that Salesforce.com (NYSE: CRM) in FY ‘09 will have $1B in cash on their balance sheet!  That is really amazing for a software company their size.  The longer term success of the SaaS model is based on predictable and transparent revenue streams that are attractive to not only investors, but also with the customers who are buying their solutions, investors who are taking stock in these firms and even employees who would rather work for these types of companies.

So back to the headline, Hybrids, Cross-Overs and TaaS.  These are new variants of  that I have come across that show that the software subscription model is evolving into many different formats.  Let me tell you about what I am seeing:

Hybrids:

Many firms are now offering solutions that don’t just comprise software but also include specialized services and hardware.  I have also found that these firms often combine a mix of hosted and on-premise deployments.  In some situations the need for an on-premise deployment is often related to the vertical market company sells into and their client’s security requirements.  For instance, in healthcare, hospitals often have very inconsistent infrastructure from location to location and the necessary integrations may be more easily accomplished by deploying behind the firewall.  Security for certain types of industries won’t allow for hosted or cloud-based systems, they really need an on-premise control of their data and systems and this would apply to many branches of the Federal government.

What’s even more interesting is the emergence of device companies who require mostly a hardware solution that is wrapped with software and services.  A great example of this is Garmin the GPS provider.  As they look at the market, is it better to sell a GPS device for $499 and a $10 a month subscription or sell the entire solution as a subscription for $39 a month?  Think about all of the device companies who are going to be challenged to get corporations to pay capital dollars for hardware, maybe a subscription option in their business makes more sense in 2009.

A couple of interesting articles to look at are Hybrid SaaS Approach is Likely Way to Go and SaaS + Appliances = Possible Peace of Mind.

Cross-Overs:

These are traditional software firms who are beginning to migrate their business models from purely a perpetual license to a subscription business.  There are thousands to these traditional firms, sometimes referred to as ISV’s (Independent Software Vendors) but not all of them are technically Cross-Overs.  Making the change can be a very difficult and dangerous endevour.  Some of the best known Cross-Overs I have run across are Concur (Expense Management),  Ariba (Procurement), and SciQuest (also Procurement).  What is clear is that many other firms are starting to moving towards a SaaS model including firms like Sabrix (Tax software), AutoDesk (AutoCAD), SumTotal, BusinessObjects (acquired by SAP), and Kana (Email).

Clearly changing your entire business model is not something that can be accomplished in a couple of quarters, it often takes companies several years to fully migrate.  Smart companies will usually create a multi-year roadmap for each of the functional areas of their company as they transition.  This transition is much harder to do if you are a publicly traded company, especially with near-term affect on cash flows.  That is why firms like SciQuest went private as part of their transition.

TaaS:

With the tightness in the credit markets and shifting technology buying habits, I believe in 2009 you will see a strong shift by any firm selling technology to embracing a subscription model.  I think this will result in a broadening of the SaaS term to expand to Technology-as-a-Service or TaaS.  Just like with the Hybrids and the Cross-Overs, this won’t happen overnight but these TaaS firms will want to have the ability to deliver their products through a subscription and host through the cloud where possible.

Think of industries that have low margins and will be challenged to purchase technology in 2009; Retail, Healthcare, Transportation, Education, State and Local governments to name a few.  Imagine if you could go to a school district and completely outfit them with laptops, wireless infrastructure, software, training and support - all for one easy monthly fee paid over five years?  What about the trucking company that wants to deploy a GPS tracking and monitoring system across their fleet, pay $5M now or $138K over 3 years?  Smart technology firms that begin to rethink their business models to take advantage of this market shift will be the big winners in 2010 and beyond.

As we enter 2009, I am hoping that the economic environment will begin to improve for technology firms.  I realize that very few analysts feel positive about the economy but one thing I agree with them is that companies will have dramatically less capital to spend on technology in 2009.  Forrester states that IT spending growth will only be a pathetic 1.6% and Gartner’s Peter Sondergaard, Senior VP of research, thinks that 2009 IT spend could be 2.3% to no growth at all.

What is interesting is that what growth there is, Software-as-a-Service will be one of the top spending market segments according to reports by Verizon and Gartner.  The reason for the optimism is primarily because these types of types of technology investments can lower a company’s total cost of running their business.   This relates to my last blog post that TCO is going to be the major driver for technology buyers in 2009.

My prediction for 2009 is that this will be the Year of the Subscription.  Not that subscription-based business models are anything new, just think about the next time you pay a bridge toll, your mobile phone bill or your mortgage.  The reason for my prediction is that companies are now faced with a once in a generation restriction on capital and companies are thinking more about reducing costs and how to make these technology purchases using their operating budgets.  With this focus on operating expense purchasing by buyers, this will place tremendous pressure on technology firms that only sell their products through a traditional capital expense model.

Here are some simple tips to get your technology business leverage a Subscription business model:

If you are an Existing Technology company with little or no recurring revenues:

• Evaluate your business for ways to provide new subscription products, services or content to your existing customers.
• Offer a subscription pricing option to new customers that have a capital budget constraint.
• Add a premium support option that can be priced as a subscription upgrade to a customer’s existing maintenance or support offering.

If you are a SaaS company then you should consider:

• Re-evaluate your pricing and packaging strategies to maximize your competitive advantage against traditional competitors. Now is a great time to grab markeshare.
• Focus on customer satisfaction because the only weakness in a subscription model is when your customers don’t renew their contracts.  Keep your renewal rates up and look to up-sell at renewal time.
• Be very clear on your company’s recurring revenue metrics; customer acquisition costs, lifetime value of you customers, and customer profitability, to name a few.  You should then develop specific plans to improve and monitor these metrics on a monthly or quarterly basis.

Keep in mind that even though this will be a difficult year, but there is always opportunity in a chaotic market  for innovative companies.  Remember 2009 is the Year of the Subscription.